2012 Cotton Market Stable at Best

As the European Union slides toward recession and growth in China, Japan, and elsewhere slows, the 2012 outlook for cotton prices continues to weaken, causing some commodity brokers to advise their clients to sell the rallies.

In mid-December, John Robinson, agricultural economist with Texas A&M University lowered his 2012 outlook for cotton prices. "I was expecting a range of 85 cents to about $1.05 for December 2012 futures," Robinson says. "My new range is 75 cents to $1/lb."

The two key factors at play in 2012 will be an uncertain global economic situation and weather. "If Europe goes into recession, that will reduce demand for apparel," says Robinson. "History shows that during times of recession, demand for apparel declines."

High prices collide with weak economy

Following the record-high cotton prices of late 2010 and early 2011, demand for cotton has steadily decreased while output has increased. "There’s been an ongoing demand response and substituting of manmade fibers," says Robinson. Buyers also continue to cancel purchases. "Mills bought high-priced cotton in a panic, and now that they are faced with those prices, they don’t want the cotton," he says.

USDA sharply reduced projected world consumption of cotton in its December World Agricultural Supply and Demand Estimates (WASDE). Global use is now projected at 111 million bales, down nearly 7 percent from 2009-10 use of 119 million bales

At the same time, world production of cotton has increased. "Farmers in Australia, Brazil, India, and China all responded to the recent record-high prices," says Robinson. The A-Index, a measure of the world’s least expensive price to deliver cotton to Shanghai, was in the upper 90-cent range in late December. "A lot of growers around the world make money when the index is at 70 cents," he adds.

With global cotton production increasing and demand weakening, world ending stocks have grown significantly over the past few years, according to USDA. In 2008-09, global ending stocks for cotton stood at 44.24 million bales (480-lb. bales), about 37 percent of total use. Global ending stocks for 2011-12 are projected to hit 54.96 million bales—more than 44 percent of total projected use.

Texan stronghold

The one factor helping to support current cotton prices is the severe drought gripping Texas, which typically accounts for about half of the country’s cotton acres. And even though Texas growers only harvested about half of the cotton acres they planted last year, analysts believe Texans will plant as many acres to cotton this coming year as they planted last year. "We expect acreage to be the same or higher in Texas," says Austin Rose, owner of Cape & Son, in Abilene, Texas. While parts of Texas received beneficial rain and snow in late December and likely will even get more precipitation before planting season arrives, Rose and others expect next year’s cotton yields in Texas to be iffy.

"When you are in a drought as severe as this, it takes a lot of rain to get back to normal," says Rose. In some of the worst hit areas of the state, analysts say 20 inches of rain will be needed to replenish soil moisture.

Robinson agrees that Texas growers will plant as many or more acres to cotton as they did last year, but is not convinced that all of it will come up. "Once it’s in the ground it’s a weather market," he notes. He expects U.S. cotton acreage to drop by about 500,000 acres as growers in the Delta and Southeast put more acres into soybeans and corn.

If the Texas drought continues, Peter Schlee, owner of APEX, Hamburg, N.Y., questions whether some cotton producers in Texas will even plant this coming year. "But we could see an increase in acreage in North Carolina, South Carolina, Georgia, and the Mid-South," Schlee says. "Corn-on-corn yields have been poor in states like Arkansas, Missouri, and Mississippi."

U.S. cotton producers won’t be making up for lost revenue by selling seed this coming year. Cottonseed prices, which earlier this year exceeded $410/ton, delivered to dairies in Texas, have already fallen by $35 to $40/ton and are expected to continue dropping. "Cottonseed prices will have to drop to about $300/ton (Texas points) to get back into the dairy ration," notes Rose.